Make your mutual fund SIP large enough to be able to meet your financial goals: View

The amount you invest every month should make a a material difference to your financial future. Otherwise, it is pointless. Your investments shouldn't be mere rituals.

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Updated: Jan 14, 2019, 02.26 PM IST

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Far too many investors are taking SIPs in homoeopathic doses.

By Dhirendra Kumar

If over the last 10 years you had invested Rs 10,000 a month through an SIP in a middling equity fund, you would have had Rs 22 lakh by now. While this may seem like a miracle for those used to bank fixed deposits and PPF returns, by the standards of long-term investments in equity funds, this is nothing remarkable. In fact, top funds would have resulted in a Rs 27-35 lakh corpus, but let’s just focus on a thoroughly average one for the moment because my point is something different.

Nowadays, a lot of investors have long-running SIPs. Decades-long uninterrupted SIPs may still not be very common but they will be in a few years because the SIP culture really started taking hold about seven or eight years ago. While the net result of SIPs becoming popular is great, one can’t help but notice that far too many investors are taking SIPs in what I would call homoeopathic doses. For example, I met someone last week who earns a six-figure salary, but invests only Rs 3,000 a month through SIP in an equity fund. This is a prime example of what many investors are doing. They are faithfully running SIPs for long periods, but with investment levels that will not have a material impact on their financial well-being. Investing 3% of your income into an equity-backed asset class means that it’s going to be little more than entertainment.

Compared to what you invest, you will eventually be very impressed by the returns you generate, but it will not make a difference to your life. A few months ago, a couple who are former neighbours came to me to discuss their investments. They put in a reasonable sum of money into their savings over the years, but almost all of it in bank fixed deposits. On my advice, they started an SIP in a good balanced fund some 15 years ago, investing Rs 2,500. They increased this sum slightly a couple of times. Now they need to gather up their investments and plan their post-retirement life. That balanced fund investment is worth about Rs 12 lakh now and they are quite amazed that what was a negligible monthly sum had resulted in an accumulation of that much money. However, in the larger picture of their financial situation over decades of retirement, Rs 12 lakh is basically nothing. The rate of return is great but the actual sum is too little to be meaningful comfort.

An equally unproductive situation is that of a saver who started off with a substantial sum but never increased the monthly investment. Someone who started off with an SIP of Rs 10,000 a month in 2004 could still be investing the same amount. In 2004, it would have been 20% of his income, now it would be about 7%. The income of most savers does increase at a rate that would allow them to comfortably increase the SIP amount by 5% every year. And yet, this would show a big payoff at the end, when you go to redeem the investment and use the money.

The idea I’m trying to get across is self-evident. For an investment to meet your financial goals, just a high rate of return is not enough. It must have a chance to reach the actual amount that will help you move towards that goal. As savers shift from India’s endemic fixed-income mentality to equity-backed in vestments, it is natural to just try out things at a low intensity, to just dip the toes into the water, so to speak. However, there’s no point in keeping one’s toes dipped for a decade or so. If you like the water, jump in sooner rather than later.

(The author is CEO, Value Research)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)